Macro Test II Review

In each of the following scenarios, what is the overall effect on equilibrium output? a. Business optimism rises and, as a result, planned investment spending rises by $5 million. The marginal propensity to consume is 0.80. We can expect equilibrium output to ____ by $___ million. b. Household wealth rises and, as a result, autonomous consumption spending rises by $4 million. The marginal propensity to consume is 0.60. We can expect equilibrium output to _____ by $___ million. c. Taxes rise and, as a result, planned investment spending falls by $2 million and consumption spending falls by $4 million. The marginal propensity to consume is 0.75. We can expect equilibrium output to ____ by $___ million.

**Change in output = Change in investment spending x Multiplier** a. Increase; 25 b. Increase; 10 c. Decrease; 24

Which of the following events would directly cause the long-run aggregate supply curve (LRAS) to shift?

- A major breakthrough in energy technology enables power companies to generate power 40 percent more efficiently - A civil war erupts in a small country which results in major death and destruction

Which components of aggregate expenditure do not directly depend on current income?

- Government Spending - Investment

Indicate one or more of the many benefits of access to high-quality education as it applies to productivity.

- Increased human capital - Development of essential skills - A larger pool of scientists and entrepreneurs

What are the primary components of aggregate expenditure?

- Investment - Consumption - Government Spending - Net Exports

Using the growth accounting equation, a country finds that half of its growth in output comes from growth in technology. Which of the following help explain the growth in technology?

- The unemployment rate decreases so more workers are employed - Firms adopt new management techniques that allow them to increase profit - A city builds a new road - Most companies decide to upgrade their computer systems - Farmers adopt new seed varieties that increase yields

Which of the following are probable reasons why some very poor countries have a very difficult time breaking out of the "poverty trap"?

- Trade-offs are much more difficult for people and governments in poor countries - Real progress often requires multiple concurrent improvements - Low average incomes mean less tax revenues for the government to invest in infrastructure

Use the table below to answer the following questions. Country, GDP per capita 2013 ($), GDP per capita 2018 ($) a. Boliv, 3664, 4592 b. Chi, 4102, 7519 c. Ghala, 2007, 2615 d. Artinia, 10860, 15854 e. Plazi, 8603, 11239

-Which country had the highest level of per capita GDP in 2018? Artinia -Which country had the highest rate of growth in per capita GDP from 2015 to 2018? Chi -Does per capita GDP in these countries appear to be converging? No, the countries with the lowest levels of GDP per capita have the lowest rates of growth.

When Bob's income is $60,000, he spends $54,000; when his income increases to $70,000, he spends $61,000. His marginal propensity to consume is:

0.7

Measuring the growth in technology directly is almost impossible. How does the growth accounting equation allow economists to calculate an implied growth rate for technology?

According to the growth accounting equation, the growth rate of output is equal to the growth rate of labor times labor's share of output plus the growth rate of capital times capital's share of output plus the growth rate of technology. We can observe or calculate the growth rate of output, the growth rate of labor, the growth rate of capital, labor's share of output, and capital's share of output. Therefore, we can solve for the implied rate of growth in technology. We cannot easily observe or calculate technology directly.

Which of the following is true? -An increase in domestic income will increase consumption and increase imports. -An increase in domestic income will increase consumption and increase exports. -An increase in domestic income will increase imports and have no effect on consumption. -An increase in domestic income will increase consumption and increase net exports.

An increase in domestic income will increase consumption and increase imports.

Which of the following will not increase LRAS?

An increase in the price level

Explain why inflation reduces the real value of nominal GDP per capita.

Because nominal GDP is calculated based on products and services value at current prices

Suppose that an increase in business confidence increases investment expenditure by one million dollars. How do you expect this increase in investment expenditure to affect equilibrium output? Will equilibrium output increase by exactly one million, more than one million, or less than one million dollars?

Equilibrium output will increase by more than one million due to multiplier effect. It will increase by multiple of rise in investment expenditure

Suppose a country is in the midst of a serious recession, with high unemployment and large government deficits. The president suggests that in times like this the government has the obligation to "tighten its belt" and cut spending, since so many families around the country have to do the same thing. Do you agree with the president? Why or why not?

Eventually cause a rightward shift of SRAS. Push AD to the left and decrease output. Decrease the price level and costs.

Define the relationship between the expenditure multiplier and the marginal propensity to consume. If the marginal propensity to consume increases, what happens to the expenditure multiplier?

Extra income leads to extra demands and/or spending and creates more income. This increase in income because of the new injection, or spending, is the multiplier effect.

A policy of attracting Foreign Direct Investment is always an effective approach to promoting economic growth.

False

The idea of decreasing marginal returns to factors of production contradicts the theoretical basis of convergence theory.

False

If a country's labor and capital grow at the same rate, is this likely to have the same impact on the growth rate of output?

It depends on whether the capital share of output is larger than the labor share of output.

You read in the paper that the dollar has strengthened in value relative to the euro. How is this change in the exchange rate value of the dollar likely to affect exports to Europe and imports from Europe?

It will decrease exports to Europe and increase imports from Europe. When the value of the dollar is stronger, Europeans receive fewer dollars per euro, so U.S. goods are relatively more expensive.

Throughout the nineteenth and twentieth centuries, the U.S. economy experienced frequent ups and downs, but over the past 200 years, the real GDP in the United States rose from roughly $8.2 billion to over $16.1 trillion, an increase by a factor of nearly 2,000 times. This growth represents a change in _______

Long-run aggregate supply

Which of the following are examples of wealth?

Money in a checking account, stocks, a house

Does the rule of 70 predict greater increases in the amount of income for poorer countries when both rich and poor countries have the same growth rate?

No, according to the rule of 70, if the growth rate of income is the same in the two countries, then the number of years it will take each country's income to double is the same.

In a Keynesian equilibrium, will the economy always be producing at its level of potential output? Why or why not?

No, because firms will always choose to produce only what they can sell at a given price.

What effect do rising business optimism and confidence have on the aggregate demand curve? What effect do falling optimism and confidence in business prospects have on the aggregate demand curve?

Rising business optimism and confidence will cause a rightward shift of the aggregate demand curve. Falling business optimism and confidence will cause a leftward shift of the aggregate demand curve.

Consider the following statements regarding how government spending responds to changes in aggregate income, wealth, and interest rates. A. Government spending responds directly to changes in aggregate income, wealth, and interest rates. Changes in aggregate income, wealth, and interest rates automatically cause government spending to change. B. Government spending does not respond directly or indirectly to changes in aggregate income, wealth, or interest rates. Changes in aggregate income, wealth, and interest rates do not have any effect on government spending. C. Government spending responds indirectly to changes in aggregate income, wealth, or interest rates. During a recession, aggregate income and wealth will fall and the government may decide to increase government spending to stimulate output and jobs in the economy. Which of the statements are true?

Statement C

Which typically can change faster: the components of aggregate demand or the components of aggregate supply? Explain.

The components of AD, such as consumption, can change faster than the components of AS, such as technology.

Southern states in the United States are, on average, poorer than northern states. Southern states also have higher growth rates in real GDP per capita, on average, than northern states. Use these facts to draw a conclusion about whether the theory of convergence is correct. What other factors should be considered?

The level of education, the population, the saving rate, the level of technology

Actual investment is different from planned investment if:

There are unexpected changes in demand.

Suppose the economy is experiencing a recessionary output gap. What has happened to planned aggregate expenditure? What might have caused this change?

When aggregate expenditure is less than aggregate output, inventories will increase and prices will fall. Firms will lower production and lay off workers to save on costs and lower prices to sell their inventory. If the resulting aggregate output is less than potential output, then this will cause a recessionary output gap, leading to a fall in employment and inflation.

In an economy, planned aggregate expenditure is given by PAE = $500 billion + 0.6Y, where Y is equal to national income. What is the value of: a. Autonomous expenditure $___ b. Marginal propensity to consume =___ c. Expenditure multiplier =___ d. Equilibrium output = $___

a. $500 b. 0.6 c. 2.5 d. $1250

a. A stock market crash reduces people's wealth. b. The spread of democracy around the world increases consumer confidence in the United States. c. The European economy crashes. d. The United States enters into an arms race with China, resulting in a significant increase in military spending. e. A revolution in Iran results in a significant reduction in the world's supply of oil. f. Terrorist activities temporarily halt the ability of Americans to engage in certain productive activities such as transportation and finance. g. Intel develops a new computer chip that is faster and cheaper than previous chips. h. A summer of perfect weather in the Midwest leads to record harvests of corn, wheat, and soybeans.

a. - The price level falls - Aggregate supply shifts to the left - Output falls b. - Aggregate demand shifts to the right - Output rises - The price level rises c. - The price level falls - Aggregate supply shifts to the left - Output falls d. - Output rises - The price level rises - Aggregate demand shifts to the right e. - The price level rises - Aggregate supply shifts to the left - Output falls f. - Aggregate supply shifts to the left - The price level rises - Output falls g. - Output rises - Aggregate supply shifts to the left - The price level falls h. - The price level falls - Aggregate supply shifts to the right - Output rises

a. In an economy, planned aggregate expenditure is given by PAE = A + bY. The expenditure multiplier is calculated as: b. If the marginal propensity to consume increases, then the expenditure multiplier will:

a. 1/(1 - b) b. Increase

Suppose the economy is in a recession and the president wants to stimulate production and create jobs. To do this, he has decided to increase government spending. Some of his economic advisors are suggesting the marginal propensity to consume (MPC) has a value of 0.9 and others are suggesting the value is 0.8. If the MPC has a value of 0.9, then the expenditure multiplier has a value of a.____. If the MPC has a value of 0.8, then the expenditure multiplier has a value of b.____. If the president believes the MPC has a value of 0.9, then he will choose to increase government spending by c._____ the same as the amount he would choose if he believed the MPC had a value of 0.8.

a. 10 b. 5 c. less than

For each growth rate below, use the rule of 70 to calculate how long it will take incomes to double. a. 1.4 b. 3.2 c. 4.9 d. 6.4 e. 7.5

a. 50 b. 21.9 c. 14.3 d. 10.9 e. 9.3

If firms expect profit to increase in the future, they are likely to a.__________ aggregate investment. If business taxes increase, then this is likely to b.__________ aggregate investment.

a. Increase b. Decrease

a. The demand curve for an individual good slopes downwards because: b. The aggregate demand curve slopes downwards because:

a. as the price of the good rises, people purchase less of the good, assuming the price of all other goods is fixed. b. a rise in the price level will reduce the real value of income, causing people to reduce their consumption.

a. A relatively small but steady economic growth rate can create a large change in economic prosperity in a fairly short period of time. This phenomenon is known as _______ Using the rule of 70, suppose a person lived to be 70 years old in a country with an average annual growth rate in real GDP per capita of 2 percent. The average income during this person's lifetime would increase by approximately: __________ times.

a. Compounding b. 4

For each of the following shocks, identify what component(s) of U.S. planned aggregate expenditure are directly affected and in which direction. a. Income tax rates increase: Which component of planned aggregate expenditure is affected? What happens to planned aggregate expenditure? b. China experiences an economic boom: Which component of planned aggregate expenditure is affected? What happens to planned aggregate expenditure? c. People become more optimistic regarding their future prospects: Which component of planned aggregate expenditure is affected? What happens to planned aggregate expenditure? d. Congress decides to increase funding for education: Which component of planned aggregate expenditure is affected? What happens to planned aggregate expenditure? e. German fashion designs become popular among celebrities: Which component of planned aggregate expenditure is affected? What happens to planned aggregate expenditure?

a. Consumption; Decreases b. Net exports; Increases c. Consumption; Increases d. Government spending; Increases e. Net exports; Decreases

If the exchange rate changes from $1.06 per euro to $1.10 per euro, then the a.__________ has become stronger relative to the b._________. When the dollar becomes stronger in value, this will c._________ exports to Europe and d._________ imports from Europe.

a. Euro b. Dollar c. decrease d. increase

For each of the following examples, state whether the activity would likely hinder or promote economic growth, and name a component of productivity each produces or reduces. a. Not requiring students to attend school. b. Granting patents on new inventions. c. Building a solid infrastructure system. d. Allowing local rivers and streams to become polluted.

a. Hinder, human capital b. Promote, technology c. Promote, physical capital d. Hinder, natural resources

For each part below, determine whether the following actions will increase or decrease productivity, and name the component of productivity that each affects. a. The local government builds a new school. b. Teachers in the new school hold classes for young students. c. A manufacturer installs robots on its assembly line. d. A research team designs a more efficient system of irrigation. e. A soda company discovers a new source of underground water that can be used to make its products. f. A professor writes a new and improved economics textbook. g. A large number of people have less access to health care. h. A worker receives on-the-job training to be a mechanic.

a. Increase, physical capital b. Increase, human capital c. increase, physical capital d. Increase, technology e. Increase, natural resources f. Increase, human capital g. Decrease, human capital h. Increase, human capital

In each of the following scenarios, calculate the overall effect on aggregate expenditure. a. A recent stock market boom has increased household wealth by $20 billion, which increases consumption by $13.5 billion, and the marginal propensity to consume in the economy is equal to 0.75. In the new equilibrium, aggregate expenditure will _______ by $ ___billion. b. Rising interest rates reduce domestic consumption by $8 billion and reduce investment by $6 billion, and the marginal propensity to consume in the economy is equal to 0.75. In the new equilibrium, aggregate expenditure will _______ by $ ___billion.

a. Increase; 54 b. Decrease; 56

A country's current level of income is analogous to the a.________ of a car, whereas its growth rate is analogous to the car's b.________ . The greater the c.________ , the d._______ , the e._________ in the f.________ .

a. Speed b. Acceleration c. Growth rate d. Faster e. Increase f. Level of income

Anything that causes the cost of production to temporarily decrease will cause a.________ aggregate supply curve(s) to b._______. Ceteris paribus, this will temporarily c._________ output and d.________ the price level.

a. The short-run b. shift right c. increase d. decrease

Indicate whether each of the following statements is true or false. a. Country A's labor share is 60%, Country B's labor share is 70%, and labor is growing at a rate of 3% in both countries. Assuming capital and technology are not growing in either country, Country B has a higher growth rate of output. ____ b. Country A's labor share is 40%, Country B's labor share is 70%, and labor is growing at a rate of 10% in country A and 6% in country B. Assuming capital and technology are not growing in either country, Country A has a higher growth rate of output. ___ c. Labor is growing at a negative rate in country A and a positive rate in country B, so country B must have a higher growth rate of output. ___ d. Labor and capital are both growing more quickly in Country A than in Country B, so Country A must have a higher growth rate of output. ___

a. True b. False c. False d. False

a. A movement along the planned aggregate expenditure curve is caused by: b. A shift of the planned aggregate expenditure curve is caused by:

a. a change in actual aggregate expenditure (output). b. a change in the nonincome determinants of aggregate expenditure.

a. In the short run, when consumer confidence falls: b. In the long run:

a. aggregate demand will shift to the left, reducing equilibrium GDP and the price level. b. lower wages and prices of inputs reduce the cost of production, so the short-run aggregate supply will shift to the right.

In the long run, changes in price a._______ aggregate supply. As a result, the long-run aggregate supply curve is b._______.

a. don't affect b. vertical

When the price level rises, the planned aggregate expenditure line shifts a.____. The b.____ in planned aggregate expenditure causes firms to c.____ production of goods and services. This explains why the aggregate demand curve slopes d.____.

a. downwards b. decrease c. decrease d. downward

Temporary policy interventions using increased government spending in response to economic shocks are generally more effective at counteracting a.________ shocks than b.________ shocks.

a. negative demand-side b. negative supply-side

Suppose the price of a major commodity like oil decreases dramatically and unexpectedly. The SRAS curve will a._________ and the LRAS curve will b.________.

a. shift right b. not change

If a negative demand-side shock and a temporary negative supply-side shock occur simultaneously, what will be the short-run effects on price level and output? a. The new level of output ______. b. The new price level ______.

a. will be lower b. cannot be determined

When empirical evidence is applied to convergence theory, the results:

are fixed

Even though many rich countries already have very high levels of physical and human capital, they are able to continuously grow because they:

can continuously increase any of the components that lead to productivity growth.

People who earn more income tend to have higher levels of consumption spending, so the value of their marginal propensity to consume must be greater than that of lower-income people. This statement is:

false, because the marginal propensity to consume is a proportion of additional income spent.

Increased government spending after a negative supply shock can cause:

further increases in the price level.

The trade-off between current consumption and investment in the capital and research that contributes to economic growth and higher future income:

is more severe for poor countries due to increased opportunity cost.

How is it possible that Switzerland, a landlocked country with almost no natural resources, is one of the richest countries in the world while the Democratic Republic of the Congo, a huge country with vast deposits of many strategically important minerals, is one of the poorest? The case of Switzerland vs. the Democratic Republic of the Congo highlights that:

natural resources do not make up for all of the advantages that the other components of productivity growth bring.

Suppose a country is in the midst of an economic boom and is running large budget surpluses. The president suggests that due to the good economic conditions, the time is ripe for a large tax cut. What are the arguments for and against this position?

push AD to the right and increase output.increase the price level and costs. eventually cause a leftward shift of SRAS.

In the late 1990s, the United States experienced very high GDP growth, record low unemployment rates, and virtually nonexistent inflation. Based on the conclusions of the AD/AS model, this combination of good economic results can be explained by a:

rightward shift of the short- or long-run aggregate supply.

Many believe that technology is very costly to create, but cheap to transfer. For example, think of the personal computer: The technology underpinning the personal computer took a generation of time and a ton of money to create. However, now that the personal computer has been created, it is easy for others to purchase and reap the benefits. The U.S. has traditionally been more apt to create new technology whereas China has traditionally been more apt to adopt technologies created elsewhere. These observations imply that growth:

should be slower in a country that has to engage in the creation of new technologies and faster in countries that get to deploy technologies that have already been created elsewhere.

Firms have an incentive to reduce production if:

unplanned inventory investment is positive.